The State Bank of India (SBI) is sitting on a ‘notional’ cash mountain of Rs 20,000 crore that it hasn’t revealed yet to the rest of the world.

Blame this on the accounting practices in the banking industry that give more latitude than in the corporate sector, enabling entities to throw a veil over aspects of their operations that they wish to conceal.

The so-called cash mountain arises because of the unreported appreciation in the value of the bank’s investments. SBI marks to market its investments that have declined in value from the
historical acquisition cost and provides for the resultant depreciation; but it does not value its investment to market if the value of investment has
appreciated.

“It is our policy not to recognise appreciation in investment, but any depreciation is provided for. The appreciation of our investments is substantial but we do not reveal the figure,” says State Bank’s managing director, S.Govindarajan.

The SBI management refers to the Rs 20,000 crore locked up in assets not marked to market as a ‘hidden reserve’, sources in the bank said. Although SBI has so far managed to conceal the moolah from public gaze, it may not be able to do so for long. The Reserve Bank of India (RBI) has asked all commercial banks to create an Investment Fluctuation Reserve that will reflect—even if partially—the appreciation in investments.

A spokesperson for RBI says: “Not recognising appreciation in the value of investment is a commendable accounting policy. It’s conservative and good for shareholders. But now, RBI has said that banks must create an Investment Fluctuation Reserve and transfer the notional gains on investments to the reserve in a phased manner over a period of three years.”

RBI asked banks to do so after they posted substantial capital gains
last year on investments in debt securities. A number of banks carry their notional gains from investments into their profit and loss account. But by doing so, they expose themselves to the risk of depreciation on those investments in
future.

“The point of creating a separate reserve for investments is to set aside funds up front for depreciation in future. Balance sheets will become more transparent if the notional gains are held separately, and a corpus is created out of the gains to provide for future depreciation,” the RBI spokesperson added.

State Bank’s total investment as of March 31, 2002 amounted to Rs 1,45,142.03 crore, which includes net overseas investment of Rs 4,669 crore. Most of the investment is in government securities—Rs 1,17,028.91 crore. Its investments in government securities increased by Rs 20,901.76 crore, or roughly 21 per cent in the last fiscal.

The bank’s investment in shares went down by over Rs 33 crore to Rs 950.24 crore; the amount funnelled into bonds and debentures increased by Rs 1,683 crore, or 15 per cent, to Rs 12,794 crore. The bank had a total provision of Rs 778.64 crore for diminution in the value of investments at the end of 2001-02, compared with Rs 628.58 crore as of March 31, 2001.

ICICI BANK GETS TOUGH WITH DEFAULTERS

FROM OUR CORRESPONDENT

Mumbai, July 17:

ICICI Bank Ltd today got cracking on wilful defaulters, issuing notices to over 20 such companies following the promulgation of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance by the government.

While confirming the development, an ICICI Bank spokesperson, however, refused to divulge details about the companies. Though it is learnt that the list may include companies such as Parasrampuria Synthetics and Mardia Chemicals, this however, could not be verified.

These notices could see banks and institutions taking stringent action against wilful defaulters, that includes taking over a company’s assets and changing its management.

Sources said that the
Industrial Development Bank of India (IDBI) and IFCI, which have stated their intentions of aggressively recovering non-performing assets (NPAs), are also in the process of despatching similar notices to errant
companies considered wilful
defaulters.

According to the current regulations, the FIs and banks can give such defaulters a time of around 60 days, in which the latter would have to settle the dispute involved.

“If these companies fail to
do so, then after this period,
the FIs can call a meeting of all the secured creditors. Here if more than 75 per cent of the secured creditors feel that the company management is not co-operating and that there is no other option but to takeover its assets, this will be done,” the official added.

FI circles here said considering the huge NPAs in their books, the practice of issuing notices to errant companies would be a continuous exercise.

The Ordinance, cleared last month, deals with securitisation of financial assets, setting up of asset reconstruction companies and enforcement of security interest.

INCOME TAX SWOOP ON XEROX INDIA OFFICES

FROM OUR SPECIAL CORRESPONDENT

New Delhi, July 17:

Income tax officers carried out countrywide raids on 23 offices of Xerox India after a tip-off from the department of company affairs (DCA) on possible tax irregularities.

Sources said IT officials were following up among other things, clues provided by DCA officials that suggested money may have been siphoned off from Xerox India to several front companies by way of payments for various services.

Officials said the tax department was looking into accounts spread over at least six years. They also claimed the company may have evaded taxes worth about Rs 25 crore.

DCA officials had earlier scrutinised the firm’s accounts in the wake of reports from its US parent to the Securities Exchanges Commission, the US market regulator, that Xerox India has been routinely bribing officials here to sell office equipment.

An intelligence co-ordination wing exists within the finance ministry for all economic intelligence, where various agencies share information that they have gleaned on a variety of cases and help each other with probes into economic offences. The current IT raid is an outcome of a meeting of this co-ordinating body.

The tax raids were conducted in all 20 offices of Xerox in the capital, two offices in neighbouring Uttar Pradesh and in the eastern metropolis of Calcutta as well as residences of top officials.

The swoops started at 8.00 am, and continued till late this evening.

IT officials said they had sealed these offices and would take into custody account books, computer files and floppies relating to their investigations. The searches are being carried under Section 132 of the Income Tax Act.

Sources however, said that neither the residence of B.K. Modi, the head of Modicorp, Xerox’s Indian partner, nor of the three American directors based in Delhi, were being searched.

A spokesperson for the B. K.Modi group said: “As a minority shareholder in the joint venture, we have strict orders to help government officials in all cases — right from the probe into possible bribing of officials as well as today’s raid by income tax officials. The actions are of national interest and we believe that everything should be out in the open.”

Without directly naming each other, Xerox and ModiCorp officials have in the past tried
to shift blame on each other on the bribery scandal. Today’s
action by Indian agencies started after new finance minister Jaswant Singh decided to
go ahead and investigate Xerox’s revelations in the US that it
had been routinely bribing Indian officials to sell their products here.

The revelations came after a review by PricewaterhouseCoopers, which suggested that the company operations show gross irregularities and unethical business practices. The US giant Xerox admitted to the SEC that its executives may have paid as much as $ 700,000 in one year alone as bribes.

While Xerox holds a 68 per cent stake in its Indian arm,
the B. K. Modi group holds about 28 per cent; the rest is held by
the public and financial
institutions. Meanwhile, US
officials ruled out any joint probe with India into the Xerox scandal but promised “full
cooperation” with Indian
authorities.

SEBI PLANS TO FILTER FIGURES

FROM SATISH JOHN

Mumbai, July 17:

The Securities and Exchange Board of India (Sebi) will soon craft a plan to goad companies into following accounting standards in letter and spirit. “We are going to work on corporate governance and improve accounting so that rules are strictly followed in letter and spirit,” Sebi chairman G. N. Bajpai said.

The move comes against the backdrop of accounting blow-ups in US companies, which have been found to have padded revenues and flattered accounts.

Back home, the books of Rolta came under the scanner after an eagle-eyed analyst with a local brokerage stumbled on the fact that 25 per cent of its Rs 302-crore sales in 2001-02 came from an inter-divisional sale.

A recent study by Global Data Services, a wholly owned Crisil subsidiary that specialises in analysing balance sheets, found that over 139 Indian companies resorted to ‘legitimate’ window-dressing to puff up profits.

While Bajpai did not name companies, he said accounting methods should evolve from form to substance. “A transition from rule-based accounting to principle-based accounting has to be made by companies to ensure good governance,” he told The Telegraph.

He did not give away details of the account-tightening plan, saying the regulator is ‘still forming a view on this’. Putting the plan into practice will, however, not be easy and Sebi will have to co-ordinate with other agencies that frame account-keeping norms.

Even so, Sebi is ready to pick up the gauntlet since the issue is crucial, and one of the elements of good corporate governance. The recent reports of leading global mega corps and findings by a Crisil subsidiary on local firms have heightened concerns about ethics in business.

The regulator set up a committee on corporate governance under the chairmanship of Kumar Mangalam Birla. It suggested some ways to improve corporate transparency, but was disbanded soon after its term ended. “We are looking at balance sheets with an analytical perspective. However, we are not disputing anything signed by the company’s auditors. They are 100 per cent legal,” said Global Data Services, which pored over books of a swathe of India Inc.

THREE-WAY BSNL SPLIT AHEAD OF SELLOFF

BY M. RAJENDRAN & ALOKANANDA GHOSH

Calcutta, July 17:

Bharat Sanchar Nigam Ltd (BSNL) — the state-owned basic telephony operator — has become too unwieldy and could be carved up into three entities.

Sources say BSNL, which was created in October 2000 and has racked up losses of Rs 4,052 crore for the year ended March 2002, will be split into three agencies that will handle its business segments — cellular services, fixed-line telephony, and long distance services, both STD and ISD.

The move to trifurcate BSNL was proposed when Ram Vilas Paswan was the Union communications minister.

“BSNL has shortlisted Icra Ltd, Frost Sullivan, PricewaterhouseCoopers and A. F. Ferguson to examine two aspects — the rating of the company in worldwide market and its net-worth. But we have not decided on who will actually conduct the job. The work is immense and we may have to ask each of them or at least two of them to conduct the study,” sources in the communications ministry said.

However, sources at Icra said the Disinvestment Commission had already given the credit rating agency the mandate and that they had commenced work on the project. The report is expected by next month.

It is not know whether the trifurcation will take place before the divestment. The Divestment Commission will have to take a call on that decision in consultation with the communications ministry.

According to a Telecom Commission member, the process of assessing the value of BSNL alone is likely to take more than two years. After that, the report will have to be studied by the ministry before it is given a final shape.

“It is too premature to comment on the structure and the final model that will be adopted. Disinvestment is a process that will have to be decided at a later stage, after the government formalises its decision on BSNL,” said the Telecom Commission member.

Earlier, it had been suggested that the telecom services company should come out with an initial public offer (IPO) to fund various projects during the year.

Until now, all the funding has been made through internal accruals. The government has not shown any interest in the IPO plan nor has it clarified its stand on the BSNL selloff.

Meanwhile, BSNL, which faces stiff competition from private telecom players, has had to make substantial investments in marketing and promotions.

The telecom service provider has outlined a business strategy that involves an expenditure of Rs 14,000 crore in the current financial year. Of this, Rs 200 crore has been earmarked for brand building, marketing and promotional activities. The investment will be funded through internal accruals. The company has spent over Rs 2,000 crore on upgrading its GSM network infrastructure as a step towards its schedule launch for GSM-based cellular services in August.

BSNL’s annual investment in the network has risen from Rs 785 crore in 1986-87 to Rs 12,510 crore in 1999-2000. The government controls the entire stake in BSNL, which has a net worth of Rs 60,000 crore, authorised capital of Rs 10,000 crore and a paid-up capital of Rs 5,000 crore.

The company has a cumulative investment in gross fixed assets of over Rs 90,000 crore and it is expected to cross Rs 1,07,411 crore for 2001-2002. BSNL has fixed assets in the form of land, buildings, cables, apparatus and plants and other infrastructure. It achieved a turnover close to Rs 24,000 crore for 2001-2002, an 18 per cent increase over the previous year.

INDIAN OIL OPENS NAPHTHA SUPPLY TALKS WITH HPL

BY SUTANUKA GHOSAL & PALLAB BHATTACHARYA

Calcutta, July 17:

In a sign that Haldia Petrochemicals’ (HPL) chairman Tarun Das’ decision to stop naphtha purchases from Indian Oil Corporation (IOC) could be paying off, the oil major has opened negotiations to supply the feedstock at market prices.

“IOC is open to the idea of selling naphtha at prices comparable to those of other companies, such as Oil and Natural Gas
Corporation (ONGC),” senior HPL officials said.

The Fortune 500 company has been forced to reconsider its price following the HPL chief’s decision to stop procuring naphtha, and instead meet its requirement from MSTC, which would sell imported feedstock.

“IOC adds a marketing margin to the naphtha they sell us. As a result, the prices go up by Rs 1,000-Rs 1,500 per tonne. Negotiations are currently on to bring it down,” said officials of HPL, which pays Rs 14,000 per tonne.

Much of 30,000-tonne naphtha produced every month at IOC’s Haldia refinery — with an annual capacity of four lakh tonnes — is picked up by Haldia Petrochem.

HPL officials said they have decided to run the plant at full capacity. “For that, we need 1 lakh tonnes of naphtha per month MSTC can supply 65 per cent of our total requirement. For the rest, we have to depend on other companies. If IOC gives naphtha at a competitive price, we are open to buying it from them.”

“HPL, which is passing through a financial crisis, will not pay more. It will go for whoever gives quality naphtha at cheaper rates,” state government sources said.

However, IOC’s marketing department said HPL has procured 17,023 tonnes of naphtha from it in July. An additional 1,000 tonnes has been sourced from Indian Oil Corporation’s Haldia Refinery as fuel. Sources say HPL has projected an offtake of 35,000 tonnes for July.

At the same time, an Indian Oil spokesperson said Haldia Petrochem’s decision to halt naphtha purchases has forced it to look at other customers as well. The company is now trying to build up an alternative customer base if HPL does not buy in the long run.

However, the spokesperson said no credit facility will be given to HPL on future naphtha purchases. Earlier, IOC had sanctioned a credit limit of Rs 300 crore.

Sources said the petro major is in talks to sell the feedstock produced at its Haldia refinery to Iffco and Rourkela Steel Plant’s fertiliser unit.

G-20 CAMPAIGN TO STOP TERRORIST FUNDING

FROM OUR SPECIAL CORRESPONDENT

New Delhi, July 17:

The meeting of G-20 finance deputies which concluded here today, called for greater sharing of information among intelligence agencies of member countries to tackle the menace posed by terrorist financing.

The meeting of deputy finance ministers from 20 leading developed and developing nations including India, the US, the UK, China, Germany, Japan, Russia, and Brazil, decided they would strengthen their economic intelligence co-ordination systems to respond faster to shifts in funding patterns used by terrorist groups and global narcotics traders.

Most of the funds flowed through informal channels, though there have been instances where the formal channels including those of global banks and merchant bankers were used.

Briefing newspersons on the outcome of the discussions at the meeting, economic affairs secretary C. M. Vasudev said the main agenda before the conference was to ensure that the benefits of globalisation reached underdeveloped countries.

The meeting observed that developed countries should remove tariff and non-tariff barriers to ensure greater flow of trade in goods and services as well as larger flow of skilled manpower from the developing world.

Vasudev said the meet had viewed the world economic outlook as one of “cautious optimism” and US and Japanese officials present at the meeting had stated that they felt their economies were on the path to recovery. The Indian representatives stated that it expected a robust 6-6.5 per cent GDP growth rate this year.

The meet concluded that the high volatility of currency markets, disconcerting trends in capital flows, equity markets in some major countries, concerns for corporate profitability and accounting practices and the economic situation in Turkey and Argentina called for concerted global efforts and co-operation.

India also put forth that as private fund flows have been drying up in the past three years it was necessary for developed nations to encourage and channelise these flows into developing markets.

JINDAL STEEL’S GREENFIELD PLANT IN ORISSA

BY PALLAB BHATTACHARYA

Calcutta July 17:

Jindal Steel & Power Ltd (JSPL) will set up a greenfield sponge iron and steel plant at Barbil in Orissa. The total investment in the project will be over Rs 2000 crore.

Confirming the move, JSPL executive vice-president and managing director, Naveen Jindal, said the company was in talks with the Orissa government and a memorandum of understanding would be signed next month.

While the sponge iron plant will be of two million tonne capacity, the steel plant will have a capacity of one million tonne.

“Orissa has quality coal and iron ore along with its geographical advantage. Therefore we are so keen on setting up such a huge plant there,” Jindal said.

Jindal pointed out that the company is already the world’s largest sponge iron manufacturer and the new plant will put it much ahead of its competitors.

Most of the sponge iron produced in the proposed Orissa plant will be consumed internally to produce steel, Jindal said. The surplus sponge iron will be sold in the market.

The new complex will also have a 200-mw power plant to take care of the power needs of the steel plant, which will have arc furnaces.

Jindal said the steel market is looking up now after a grim period of recession. And the demand will increase in the coming years too.

Although companies are shying away from either setting up a new plant or from expanding capacities, Jindal has put a brave foot forward in anticipation of growing demand for steel and sponge iron both in the domestic market and abroad.

Jindal refused to comment on whether the new steel unit would manufacture flat or long products. “Discussions are still on about the products in our steel mill in Orissa. A decision will be taken after examining all pros and cons,” he said.

The company has applied for mining lease for coal and iron ore in Orissa. “We already have adequate knowledge about mining operations and hence we need captive coal and iron ore mines,” Jindal said.

“The Orissa government, which has been very co-operative with us, is identifying the required land for us,” he said.

JSPL was formed after Jindal Strips Ltd hived off the sponge iron and power divisions in 1998 following the restructuring of O.P Jindal group. The company has its sponge iron and power plant in Raigarh.

The existing sponge iron manufacturing capacity of the JSPL is 6,20,000 tonnes per annum and plans are afoot to raise the capacity further. The company has captive coal and iron ore mines and a 30,000-tonne ferro chrome mine.

HM MOVE TO CLEAR STOCKS

FROM SHASHWATI GHOSH

New Delhi, July 17:

Hindustan Motors plans to halt production for five days this month at its
Uttarpara plant, and could continue the practice into subsequent months if inventories pile up.

B. K. Chaturvedi, president and executive director of Hindustan Motors told The Telegraph, “Shutting down production for a few days makes economical sense once three to four days of inventory piles up. HM has been continuing this practice over the past year. On an average, we shut down for five days a month to accommodate the rising stocks before resuming production again.”

Hindustan Motors today a
lso notified the Bombay Stock Exchange (BSE) that the company would shut down its Uttarpara manufacturing unit
on days other than the stipulated holidays to reschedule their
production and inventory planning.

“The company has to take recourse to suspension of their manufacturing activities during non-working days which are
in addition to the weekly off days, only to re-schedule their production and inventory planning strategies in the normal course of business,” the notice stated.

“This way not only is stock kept in check, but the company also saves on other daily costs like electricity, canteen and daily labour. The local management decides the off-days,” he added.

Chaturvedi admitted that the practice was being adopted only at the Uttarpara plant and not at the other two plants at Pitampura and Chennai. The Uttarpara plant has a capacity to produce 80-90 Ambassadors a day; the demand for the car has fallen to 1,300 to 1,400 per month.

If the factory is kept running on all working days then the car-maker would have piled up a stock of over 2,000 cars by now. “The plant is now being prepared for the new retro Ambassador that the company showcased at the Auto Expo in Delhi last January. If demand picks up, we will no longer have to shut down the plant for a few days every month,” he said.